Thursday, October 14, 2010

How to Write a Business Plan

The purpose of a business plan is to recognize and define a business opportunity, describe how that opportunity will be seized by the management team, and to demonstrate that the business is feasible and worth the effort.  The use of business plan services can of course greatly help with this. Where implementation of the business plan requires participation of lenders and/or investors, the plan must also clearly and convincingly communicate the financial proposal to the prospective stakeholders: how much you need from them, what kind of return they can expect, and how they can be paid back.

Many entrepreneurs insist that their business concept is so clear in their heads that the written plan can be produced after start-up; this attitude "short-circuits" one of the major benefits of producing  the plan.  "A realistic business plan might save you from yourself by persuading you to abandon a bad idea while your mistakes are still on paper," says Ben Botes from Caban Investments in the UK

Do many people need to be saved from themselves?  Are many entrepreneurs so determined to go into business that they overlook or underestimate the potential pitfalls?  Is that all bad?  Can many business proposals stand the harsh light of skepticism?

Let us say we worked out the numbers on paper, and are convinced that we do not need to be saved from ourselves.  Do we still need to write the plan?  The discipline of writing a plan forces us to think through the steps we must take to get the business started, and, to "flesh out ideas, to look for weak spots and vulnerabilities," according to business consultant Eric Siegel.  A well-conceived business plan can serve as a management tool to settle major policy issues, identify "keys to success," establish goals and check-points, and consider long-term prospects.

Who is the audience for it?  Certainly, the plan is very useful if we are looking for investors or lenders.  It is the primary tool used to convince prospective stakeholders that the idea is promising, the market is accessible, the firm's management is capable, serious and disciplined, and that the return on investment is attractive.  But even if we can finance the venture ourselves, these are useful issues to address.

What are the elements of a good business plan, and how does it differ from a bad one? The appearance of the plan says something about its preparers.  It should be professional, though not lavish, so as not to distract from its contents.

While the formats of business plans can be as varied as the businesses themselves, there are components that should appear in all plans.  These include an executive summary, elements which describe the opportunity, elements which specify how the business will operate, an analysis of financial expectations, a closing summary, and any supporting documentation.

Let us discuss each of these in a little more detail, with an audience assumed to be a reader who might be a prospective investor or lender, a trusted professional advisor, or a friend whose business judgment we value.

The cover and title page should contain company name, address, phone number, primary contacts, and the month and year of issue.  Often, the issuers include a copy number to control circulation.

The executive summary introduces the opportunity, and contains highlights of the substantive sections.  It should concisely explain the current status of the company, its products and/or services, benefits to customers, and summary financial performance data.  Where investment is being solicited, it should also include the amount of financing needed, and how investors will benefit and harvest their gains.  With all this information, this summary should still be held to two pages, to insure its being read, and must generate enthusiasm about the proposal to entice the reader to consider the entire plan.

The business plan conclusion is a shorter summary, more directed to what is being asked of the reader.  Supporting documentation includes relevant marketing research, and financial details and statements behind the financial proposal.

Tuesday, October 5, 2010

Creating and Using a Business Plan

Interestingly enough and against the grain of many an entrepreneur, creating and using a business plan is among the most important steps toward creating your business and establishing its credibility, yet many entrepreneurs seem to ignore researching how to develop one. This affects their credibility, hurts their chances of securing funding, and makes it difficult to keep the business on track.
To develop a business plan, you should first consider what your offering, both as-is and in relation to your customers and competitors. What do you offer customers (that your competitors don’t – and, no, it shouldn’t be some meaningless gimmick)? What obstacles exist in bringing the product to market? You must answer those questions.
As a continuation of that, you should also analyze your market. This means finding out what your customers want and how you can reach them. You must provide information about market size, potential market growth, and delivery plans. This should also provide a marketing strategy with detailed information regarding costs. If you are creating a retail business, you should include information about location, including market demographics.
You also need to consider competition, as well as your strengths and weaknesses over them. Find out how to exploit the competitors’ weaknesses, and cope with their strengths. However, be realistic about your prospects and don’t hide information. You’ll only hurt yourself in the end.
Your business plan must also include information about your planned organizational structure. How many employees? How many managers? How many senior personnel? If you have managers, provide information about their experience. Your plan should provide a detailed picture of who’s in charge. Investors want to know that your managers know the industry and your business’s operational procedure.
You should also provide information about manufacturing procedure, as well as any vendor and distributor relationships needed to get the product ready and delivered to the customers.
Provide financial information, including a three-to-five year historical summary and future projections. Of course, if your company is new, you won’t have a three-to-five year history, so just provide what is available. In addition, you should provide information regarding any potential collateral, which can help you secure funding if the numbers don’t help investors feel confident in your business, but be aware that such collateral will be forfeit if the investors are unsatisfied with your company’s performance.
Finally, you need to provide information about company history and objectives.
With this information, you should be able to develop a successful business plan.

Friday, October 1, 2010

Business planning - case evidence and examples

Business plans are certainly not a one size fits all. If you are a serial entrepreneur like myself you may have learned this along the way. Whether you have used strategic planning in the organizational context, perhaps through using a business plan template or two to ensure you get the finer details spot on, a formal business plan when seeking business finance from a bank or investor - perhaps using the least business plan software to ensure you cover the requirements of said investors or banks, a very flexible and practical plan to support you with your small business or simply a to do list for your day to day running of the business, perhaps with a few mind maps and strategies with which to cope. BUsiness planning however you see it really needs to be seen as a crucial aspect of achieving dreams goals or objectives. This is perhaps better shown in tow simple cases, looking at just how business planning can be used.

Case Study #1: Skip the formal document
Reece Pacheco and his fellow co-founders started the game-film editing and sharing service Homefield in 2007. When they started to court investors, they were regularly told to send their business plan. Reece spent a lot of time and energy creating a traditional one. It was difficult because, as he says, "early on, we didn't know everything we needed to know." In two weeks what he'd written was no longer relevant. He also found that the investors and partners most intrigued by Homefield didn't care about the plan. They just wanted to hear his story and why he was passionate about the business. In fact, those that were less interested were more likely to request a plan.

Reece decided that a traditional plan wasn't practical. "The web moves too fast. Most businesses move too fast he explains. "Investors' attention spans have gotten shorter and shorter." And the customers Homefield has secured are much better proof of their company's viability than any five-year projections. So Reece now uses a six-page PowerPoint deck that is flexible and easy to update. The aim is to "build relationships," to convince partners and investors that he and his colleagues are the right people to execute on their unique idea. And so far, it's worked.

Case Study #2: Tell a compelling story
Jenny Machida joined the founding team of Sevident in December 2009 as the Chief Business Officer. Sevident is a start-up focused on developing a rapid diagnostic platform for infectious disease. Like many other businesses, their value lies in the flexibility of the technology they offer, so it's critical to convey its various applications. The challenge is to show that in a business plan without sounding unfocused.

The team started off by describing the business in presentation form. They had PowerPoint decks and one- and two-page executive summaries but hadn't developed a formal business plan because no potential partners, customers, or funders had asked for one. "You don't need a plan until you have an audience for it," Jenny says.

But, they decided to create a formal plan because they assumed potential funders would need one further along in the process. The document they use now, which is roughly 30 pages including data and financials, extends directly from the earlier presentation materials and is regularly updated as the business evolves.

Rather than explaining all the potential applications of their technology, they now tell a concrete story about how they will use the first application. The plan is still flexible in the way it describes the company's operations and how they will play in various markets. "We've made a deliberate choice to foreground the capability of the technology itself," Jenny explained, rather than focus exclusively on a specific market opportunity. The plan demonstrates that they have thought of all of the various options for how the business may develop without laying out exhaustive and low-probability contingency plans. "Everyone knows that there's uncertainty to a new business but you still need to tell a compelling story of how you're going to knock down risk," Jenny says. Sevident is now in active diligence with several venture capital firms.

Both cases show some of the varied uses and options for the business plan, not just the must do and wish I did not have to versions. This really can and should be a key element of succeeding with your business.

Scenario planning for start-ups

With start-up companies especially often seeing business planning more as a chore, large organizations around the world recognize it as a key tool thought which to prepare them selves for the opportunity and challenges that the future may hold. A business plan strategy that has been used with varied success for decades now is that of scenario planning.The scenarios relate closely to key elements of the strategy such as the competition,technology, or geography. The approach is then to develop a “resilient” strategy that can deal with wide variations in business conditions.For instance, each scenario is analysed to determine the optimal setting for each element (What would be the best marketing strategy for Scenario A? For B?) The most resilient option for each strategy element is chosen for each of the scenario-specific settings. 

The resilient options are integrated into an overall, co-ordinated business strategy, takeing all scenarios at face value without judging probabilities.This approach makes maximum use of scenarios in strategy development. It provides management with the maximum feasible range of choice and forces careful evaluation of these options against differing assumptions about the future. But it requires effort and patience; and it works best when the decisions -makers participate directly in the scenario process. An example of this approach is the work that United Distillers (now Diageo) has carried out a number of scenario development exercises to assess the future of markets such as India,
South Africa and Turkey and hence the potential for and possible direction of business.

Scenario planning is regularly used at US-based clothing specialist Levi-Strauss by senior management who sit on cross-functional committees at headquarters level. Scenarios have been used to heighten awareness of the challenges facing the business, and to develop strategy in relevant areas such as the environment. They have been used to help thinking in the context of challenges, such as what would happen if cotton no longer existed, or what would be the impact of the deregulation of the cotton industry in the US.Erste Allgemeine Versicherung, an insurance company based in Austria, first used scenarios in 1988. The main areas considered were politics, economics, the insurance industry structure and changes, technology and demographics. The objective was to look at the business environment and how other competitors might develop. As a result of the scenario process, the company anticipated the fall of the Berlin Wall and the opening up of Eastern Europe before it happened. This was identified as part of one of the scenarios in 1988. This enabled the company to be ready to move into Eastern Europe and therefore be one of the first companies to set up in Hungary. Companies were also founded in the Czech Republic,Slovakia and Slovenia.

BA used this approach to develop strategy, taking each scenario through to a full numerical plan. With hindsight, they thought that the last stage – the full numerical plan - had been more work than warranted by the benefit. This seems to be a consensus, that the best use is staying at the descriptive level, to avoid a focus on the detail of the model rather than exploring the underlying assumptions.Strategy Evaluation This method of connecting scenarios to planning uses scenarios as ”test beds” to evaluate the viability of an existing strategy or compare proposed strategies. It is often the best first use of scenarios in a company’s strategic-planning system. The strategy may have derived from a set of implicit or default assumptions or a single- point forecast – the approach identifies quickly “bottom-line” issues and provides senior managers with immediate evidence of scenarios’ utility.It is often used in “management game” mode, where a business unit is played against a competitor under each scenario. This allows the management to assess the likely success of the business in the diverse conditions of the scenarios. In particular, it homes in on opportunities that the strategy addresses and those that it misses, threats/risks that the analysis has foreseen or overlooked, and factors affecting competitive success or failure. This approach normally highlights the options for changes in strategy and the need for contingency planning.For instance, in 1995, ICL’s manufacturing division had been trading as D2D for several years and increasing the amount of work done by the division for organisations outside ICL. D2D’s business plans needed to cover a range of external business conditions and customers. We applied the test bed of our IT industry scenarios to the plans, and realised that the plans were based on a set of default assumptions closely aligned to one scenario. When we ran the plans through the wind test of the other scenario, we found that a number of the operational and business characteristics that D2D had assumed to have very high value were of less interest to the customers in this scenario. The analysis helped us to decide to sell D2D to Celestica, a global contract manufacturing company, in December 1996.Sensitivity/Risk Assessment   Scenarios can be used in two rather different ways to assess risk. One way is to Identify key
conditions in the future market/industry environment (such as size/growth of market, changes in regulatory climate, or a technological breakthrough) that would be necessary for a “go” decision on a particular project. The other is or to apply scenarios to a portfolio of projects and to use a technique such as a Market Attractiveness/Capabilities matrix to evaluate the comparative risk of the projects or businesses.Using scenarios to evaluate a specific decision (such as a major plant investment or new business development) is very useful if there is a very clear and specific “decision focus” that lends itself to a “go/no go” decision. For instance, a construction company uses the technique
for “back of the envelope” examinations of business propositions, and as part of its project portfolio management. In more complex cases, computer modelling (with scenarios providing assumptions) can be used to evaluate the strategy’s resilience or vulnerability to differences
in business conditions. So for instance 3M Telecommunications Systems Division has used scenarios, linked to payoff and risk assessment, to implement new strategies following deregulation.Hedging or contingency Planning

This fourth method starts with one particular view of the world – this may be the assumptions behind the current plan, or “the most probable” of several separately developed scenarios. Then a strategy and plan is developed to fit this scenario, maybe using a SWOT (strengths, weakness, opportunities, threats) analysis.The strategies & plans developed for one scenario are then tested against other scenarios to assess resilience and the need for modification, “hedging”, and contingency planning. In its step-by-step process, this addresses many key questions that scenario-based strategy should ask, and avoids the pitfall of focusing on only one scenario.Using probabilities attached to scenarios has been extensively used in France, with Michel Godet’s guidance, as described in (5). Probabilities are also part of the Batelle approach, and the CSM (Comprehensive Situation Mapping) tool, which has been used for instance to model

new banking competitors.Perhaps the issue is that large corporations have more at stake, or perhaps its more a case that these corporations realize what is at steak because of what they have achieved. Entrepreneurs to need to take the issue of planning more seriously. Yes of course we need to be flexible and responsive to what clients, the environment and competitors through at us and having a number of well researched and resourced options to our disposal is half the battle won.